High Volatility Mean Reversion

Entry Logic

• Entry trigger: A stock or market makes an extreme move on high volatility.
• Confirmation: A reversal candle forms at the peak or trough of the move.
• Timeframe: 5-minute or 15-minute chart.
• Location context: The move is far from the mean (e.g., a moving average).
• Market condition: High volatility, overextended market.

Exit Logic

• Profit target: A reversion to the mean (e.g., the 20-period moving average).
• Scaling out: Scale out as the price moves back towards the mean.
• Trailing stop: Trail the stop on the other side of a short-term moving average.
• Signal failure exit: The price continues to move in the direction of the initial impulse.
• Opposite signal exit: A new extreme move in the opposite direction.
• Time expiration: Exit if the price has not reverted to the mean in a reasonable time.
• Momentum loss: The momentum of the reversal fades.

Stop Loss Structure

• Hard stop: Beyond the high or low of the extreme move.
• Soft stop: If the price fails to move back towards the mean.
• Max dollar loss: 1% of account capital.
• Max percent loss: 1% of account capital.
• Structural stop: Beyond the high/low of the reversal candle.

Risk Management Framework

• Risk per trade: 0.5% of account capital.
• Daily limit: 2% of account capital.
• Weekly limit: 5% of account capital.
• Max drawdown: 15% of account capital.
• R:R requirement: Minimum 2:1 risk-reward ratio.

Position Sizing Model

• Sizing approach: Fixed fractional sizing.
• Volatility adjustment: The high volatility requires a smaller position size.
• Conviction sizing: A+ setups get full size.
• Scaling in: Not recommended.
• Scaling out: Scale out as the price moves towards the mean.

Trade Filtering

• Market conditions to avoid: Low-volatility, trending markets.
• Specific setups required: An extreme move on high volatility.
• Instruments: Volatile stocks and ETFs.
• Time restrictions: Best during the first and last hour of the trading day.
• Chop/news avoidance: Be aware of news that could be driving the move.

Context Framework

• Trend direction: This is a counter-trend strategy.
• VWAP relationship: The price is far from VWAP.
• MA relationship: The price is far from its moving averages.
• Range location: The price is at an extreme of its recent range.
• Higher TF alignment: Not applicable.

Trade Management Rules

• Breakeven: Move stop to breakeven after a 1R profit.
• Scale out: As the price moves towards the mean.
• Add size: Not recommended.
• Fast vs slow moves: Expect a fast move back towards the mean.

Time Rules

• Optimal window: During periods of high volatility.
• Times to avoid: During low-volatility periods.
• Session notes: Works well in all major sessions.

Setup Classification

• A+ setup: An extreme move with a clear reversal candle.
• A setup: A significant move with a reversal candle.
• B setup: A moderate move with a weak reversal candle.
• C setup: A trending market.

Market Selection Criteria

• Instruments: Volatile stocks and ETFs.
• Volume: High volume on the extreme move.
• Volatility: The strategy is based on high volatility.

Statistical Edge Metrics

• Win rate: 60-70%.
• Avg win: 1.5R.
• Avg loss: 1R.
• Profit factor: 1.6.
• Expectancy: 0.4R per trade.

Failure Conditions

• When strategy fails: When the extreme move is the start of a new trend.
• Specific scenarios to avoid: Fighting a strong trend.

Psychological Rules

• Mental discipline: The courage to fade a strong move.
• Key mental discipline requirements: The discipline to take profits at the mean.

Advanced Components

• Regime detection: Use a volatility filter to identify high-volatility regimes.
• Filters: Not applicable.
• Correlation: Not applicable.
• MTF alignment: Not applicable.

Location

• Where strongest: In volatile, range-bound markets.
• Where weakest: In strong, trending markets.